Household fuel consumption and polluter pays principle : an evaluation of the elasticity of household fuel consumption in Malta

Abstract

The increasing importance of climate change and global warming have generated endless alternatives about how future transportation could be improved. One of the major greenhouse gases causing global harm is carbon dioxide (CO2) and most of the emissions of this pollutant come from transportation. Malta is no exception and although there has been a significant amount of pressure from European and international institutions to reduce the levels of CO2, Malta is still far from achieving the required targets set by these institutions. The main aim of this study is to show that there exist fiscal policy tools to help reduce domestic fuel consumption. This is known as the Polluter Pays Principle, which can be applied in the form of taxation on fuel prices to incentivize a decrease in the consumption of the pollutant. This research builds on the existing empirical literature to fill the local literature void. This study makes use of primary data gathered in the form of an online questionnaire. Data regarding respondents’ fuel consumption patterns was attained and then compared to fuel consumption patterns after an imposition of a hypothetical tax. Taxation rates were imposed on participants at randomized levels of either 25%, 50% or 100%. Furthermore, given that the sample gathered had overrepresented and underrepresented particular subgroups of the true population, an Inverse Weighted Probability using a logistic model was utilized. Such weighting is important so that the study results could be inferred to the broader Maltese population. The regression results are split into two parts. Firstly, results based on a weighted variable ‘district weight’ are discussed and subsequently results based on ‘gender weight’ are put forward. These variables depict the variation between the sample and the true population of the distribution of driving licenses based on a district and gender basis. The overall regression results show that for each taxation scenario, consumption decreases irrespective of the weighting, with the biggest decrease in consumption coming from the highest taxation level. Furthermore, the study also concludes that fuel is an inelastic good. Policy recommendations are also discussed. The statistically significant results of this study show that a fiscal policy in the form of tax on fuel has the potential to be the most effective policy in reducing CO2 emissions. In fact, this study finds that in Malta a 1% tax-induced increase in the price of fuel leads to an average decrease of 0.48% in weekly fuel consumption. Such a policy would eventually raise tax revenue which could then be redistributed to those who endure negative externalities of the pollution generated.